PNB fraud impact: PSBs told to keep foreign branches in check

PNB has maintained that it will honour bonafide commitments and that final payment to other lenders will be based on what the investigation reveals.

The government has asked state-run lenders to ensure strict compliance with all regulatory norms and proper audit of their foreign branches.
A finance ministry official said that a mechanism for coordination between foreign branches of all public sector banks (PSBs) is also being explored.

"Any such initiative has to come from the banks. We will provide any support in this regard," said a government official aware of the deliberations, adding that foreign branches of PSBs should ensure proper compliance and audits as per regulatory requirements.

"If any other bank branch would have found something amiss with the Letters of Understanding (LoUs), and shared it with their headquarter or Punjab National Bank (PNB) this could have been stopped much earlier," the above quoted official said.

Nirav Modi, along with his uncle Mehul Choksi, allegedly used such fake LoUs issued by PNB to avail buyers' credit from overseas branches of Indian banks worth an estimated Rs 11,300 crore.

PNB has maintained that it will honour bonafide commitments and that final payment to other lenders will be based on what the investigation reveals. "If the entire onus is on us, we'll own the responsibility. We are not going back from it but nobody can be a beneficiary of this," PNB managing director Sunil Mehta had said.
The finance ministry may also review the guidelines for placement of bank officials in overseas branches. As per existing norms, the CEO and the second officer of any foreign branch are not changed simultaneously and within a short period of each other.

"Suggestions will be made by the government representatives on boards of these lenders. Also, selected candidates should have work experience in different verticals such as treasury operations and risk management," the official explained.

At the Global Business Summit last week, finance minister Arun Jaitley had said, "If a fraud is taking place at multiple branches of a banking system and you don't have a single employee who raises the red flag, doesn't that become worrisome?"

Jaitley had further questioned the auditing systems and the effectiveness of supervision. "Regulators ultimately decide the rules of the game and have to have a third eye which is perpetually open and looking at the sector," he had said, adding that unfortunately, in the Indian system, politicians are accountable, regulators are not.

Foreign branches of the PSU banks involved have already been asked to submit a report to their respective headquarters to assess if there were any lapses, said a bank executive aware of the development.